How much should I really contribute to my 401(k)?


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Deciding how much money to contribute to your 401(k) should be based on your desired retirement age, your annual spending needs, and your current savings. Establishing the right 401(k) contribution today helps ensure you put away enough money to enjoy your golden years in comfort. This guide offers pointers to help you decide the right amount to contribute to your 401(k).

In this guide, we’ll cover :

How much should I contribute to my 401(k) every month?

What percentage of my income should I contribute to my 401(k)?

What about matching contributions to your 401(k)?


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Catch-up contributions and your 401(k)

How much can I contribute to my 401(k)?

Will vesting impact how much I contribute to my 401(k)?

How much should I contribute to my 401(k) every month?

To establish your monthly 401(k) contribution, determine the age at which you want to retire, estimate your annual spending needs once you’re retired and calculate how much money you’ve already saved.

For instance, if you’re currently 22 and aiming to have $1 million in your 401(k) by the time you’re 62, that means you have 40 years to save for retirement. Here’s what that might look like, depending on your income and contributions, figuring a 6% annual rate of return on your investments:


Contribution %

Employer Match

Starting balance

Years Invested

Total Balance



100% up to 3%






100% up to 3%




This doesn’t take into account raises, job changes, an increase in contribution (or a decrease, if you need to stop making them) and other factors. But it does give you an idea of how much your salary and contributions matter when building your 401(k).

It might be hard enough to stay current on your bills, let alone contribute to your retirement. You may want to adjust your retirement goals, like how much you’ll need in retirement or the age when you’ll retire. There are a few different ways to calculate this, like the 25x rule and the 4% strategy.

Use the 25x rule to determine your 401(k) contribution

The 25x rule is a determination of what you’ll be spending every year of retirement, and then multiplying that by 25. The premise of this is that you’ll need 25 times your annual expenses to live comfortably in retirement. When you figure out housing, transportation, living expenses, health care and other needs, you may find that you don’t need $1 million in retirement.

Use the 4% strategy to determine your 401(k) contribution

The 4% strategy is based on how much you’ll withdraw the first year of retirement and use that as a guideline for withdrawing every year after that. Let’s say you have $1 million in retirement, the first year you’d withdraw $40,000 (0.04 x 1,000,000). The next year, you’ll withdraw the same amount but adjusted for inflation. If inflation is around 2%, you’d withdraw $40,800 (0.04 x 1.02 x 1,000,000). Every year you’d continue to adjust for inflation on top of your $40,000.

What percentage of my income should I contribute to my 401(k)?

401(k) contributions are different for everyone, which means what works for some might not work for all. Earl Johnson, senior vice president and wealth manager at EverGreen Capital Management, said this figure is based on each person.

“I don’t usually discuss any rules of thumb because most people’s situations are so different,” Johnson said. “But I would say the first deciding factor is if your employer provides a matching contribution, you must contribute enough to get all matching funds.”

Johnson said that instead of creating a budget line item for our 401(k) contributions, your budget should start when your paycheck hits your bank account after your contributions have been made. This should be used as a guide no matter what your income is.

What about matching contributions to your 401(k)?

Matching contributions can be one of the biggest differentiators to your work-sponsored 401(k) plan. While it’s important to contribute as much as you can, employer matches can sometimes double your retirement savings.

“If you’re contributing 3% and your employer matches 3% dollar for dollar, you are in essence putting away 3% of your salary pre-tax for the benefit of a 6% contribution to your 401(k),” Johnson said. “For a person making $50,000 that’s a $3,000 annual contribution that literally cost you only $1,170 per year.”

Matching comes in a few different forms, like dollar-for-dollar matching and partial matching. Dollar-for-dollar matching is when your employer matches 100% of your contribution up to a certain percent. Partial matching is when your employer matches a portion of your contributions. While you’re still getting free money from your job, it’s not as much as a dollar-for-dollar match.

While having an employer match is one of the biggest benefits of a 401(k), not all companies offer this. Ask your company if they have a matching program and how you can take advantage of it.

Catch-up contributions and your 401(k)

If you didn’t make enough money to max out your 401(k) contributions early on in your career, or you put off higher contributions to focus on other financial necessities, you might contribute to catch-up contributions.

These are contributions you can add along with your regular contributions, as long as you’re 50 years of age and older. This is important because IRAs cap your catch-up contributions at $1,000. For 401(k)s, that limit is $6,500.

“Investing more of your income while working by maximizing allowable contributions can help increase your likelihood that you can sustain a healthy income in retirement,” Johnson said.

Everyone’s retirement needs vary, so what you need to save now could be different compared to someone else’s. Those with higher wages might want to keep up the same lifestyle in retirement, while others might downsize their home or limit their spending now that they’re not working. Catch-up contributions could help you sustain your current lifestyle or just help you make it through retirement without running out of money.

How much can I contribute to my 401(k)?

For 2020, the 401(k) contribution limit is $19,500. People who are 50 or older may make additional catch-up contributions totaling $6,500 a year. Employers may contribute up to $37,500 a year. All in, the maximum annual contribution in 2020 for someone younger than 50 is $57,000, while the maximum for someone 50 or older is $63,500.

If you can max out your 401(k) contributions without sacrificing the standard of living you want or need, you should consider doing so. Putting as much as possible into your 401(k) now can help guarantee income security in retirement.

What if you contribute too much to your 401(k)?

Putting too much money away in your 401(k) could incur penalties. If you’re aware of the over-contribution, tell your plan administrator as soon as you’re aware of it. You might be able to change some of the contributions to the following year to avoid tax implications.

This should all be handled before Tax Day to avoid paying taxes on the money you over-contributed. Penalties include getting taxed twice. You’ll get taxed for the year you contributed the money, and then again when the deferral is distributed.

Will vesting impact how much I contribute to my 401(k)?

Vesting is when a company offers matching 401(k) contributions, but you don’t immediately own that money. Instead, you’ll need to wait until you’re “vested,” or have been with a company for a certain period of time, to take ownership of the matching contributions — what’s called “fully vested” in retirement lingo.

Vesting varies by company, but many vest their matching contributions in three to five years — this process is called the vesting schedule. Until you are fully vested, you might be able to cash out on some of the matching contributions, but not all. For instance, you could be 20% vested after one year, then 40% vested after the second one. If you leave after two years, you’ll get 40% of your employer’s matching contribution. If you wait until you’re 100% vested, you’d have to stick around for at least five years.

If you leave a company before you’re 100% vested, you can take all of the contributions you made with you. However, you’ll lose the firm’s nonvested matching contributions.

Do you have a 401(k)?

If you’re not sure what your company offers for retirement plans, ask your human resources department what your options are. You might qualify for a work-sponsored 401(k) and your job might even match contributions. Even if you don’t get a company match, contributing as much as you can to a 401(k) is a great investment in your future.

If you don’t have a work-sponsored 401(k), it’s a good idea to explore other options, including IRAs. Even if you have a 401(k), an IRA is a good personal retirement plan to have in the event you leave your current job and need a place to move over your funds. Regardless of your setup, it’s important to contribute to a retirement plan for your future.

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